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| BMTC > SEC Filings for BMTC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Brief History of the Corporation
The Bryn Mawr Trust Company (the "Bank") received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the "Corporation") was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, PA, a western suburb of Philadelphia, PA. The Corporation and its subsidiaries provide wealth management, community banking, residential mortgage lending, insurance and business banking services to its customers through nine full service branches and seven limited-hour retirement community offices throughout Montgomery, Delaware and Chester counties. The Corporation trades on the NASDAQ Global Market ("NASDAQ") under the symbol BMTC.
The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.
The Corporation competes in a highly competitive market area and includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many regulatory agencies including the Securities and Exchange Committee ("SEC"), NASDAQ, Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking.
Results of Operations
The following is Management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for the Corporation. The Corporation's consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. Current performance does not guarantee, and may not be indicative of similar performance in the future. These interim financial statements are unaudited.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting principles generally accepted in the United States of America (US GAAP) applicable to the financial services industry. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year's financial statements to the current year's presentation. In preparing the consolidated financial statements, Management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates.
The allowance for loan and lease losses involves a higher degree of judgment and complexity than other significant accounting policies. The allowance for loan and lease losses is calculated with the objective of maintaining a reserve level believed by Management to be sufficient to absorb estimated probable credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan and lease portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, expected loan commitment usage, the amounts and timing of expected future cash flows on impaired loans and leases, value of collateral, estimated losses on consumer loans and residential mortgages and general amounts for historical loss experience. The process also considers economic conditions, international events, and inherent risks in the loan and lease portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from Management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods. See the section of this document titled Asset Quality and Analysis of Credit Risk for additional information.
Other significant accounting policies are presented in Note 1 to the Corporation's audited consolidated financial statements filed as part of the 2008 Annual Report on Form 10-K and footnotes 3, 4, 5, 7, 9 and 11 to the Corporation's unaudited financial statements filed as part of this Form 10-Q. There have been no material changes in assumptions or estimation techniques utilized as compared to prior periods.
Executive Overview
The Corporation reported first quarter 2009 diluted earnings per share of $0.31 and net income of $2.6 million compared to diluted earnings per share of $0.34 and net income of $2.9 million in the same period last year. Return on average equity (ROE) and return on average assets (ROA) for the first quarter ended March 31, 2009 were 11.54% and 0.92%, respectively. ROE was 12.83% and ROA was 1.23% for the same period last year.
The Corporation's first quarter performance is strong given the continued economic stress. The Corporation is well positioned for continued growth and profitability, and continues to be well-capitalized and to exceed regulatory requirements for a well-capitalized organization. The capital position was enhanced by the addition of $10 million in capital raised on April 20, 2009. This includes $2.5 million through the sale of unregistered equity securities, in a private placement, to an accredited investor and $7.5 million in subordinated debt which is intended to qualify as Tier II capital at the Bank. This capital strengthens the Corporation's and the Bank's capital position and provides additional resources to take advantage of strategic opportunities to invest and expand. This new capital was raised without any government assistance.
Net income decreased $300 thousand or 9% to $2.6 million in the first quarter 2009 from $2.9 million in the same period last year. Factors contributing to the decrease include an increase in the provision for loan and lease losses in the leasing portfolio, increased operating costs attributable to the opening of the West Chester regional banking center in January 2009, the opening of The Bryn Mawr Trust Company of Delaware in the fourth quarter of 2008, and continued net interest margin pressure. The net interest margin for the first quarter of 2009 was 3.62% compared with 3.63% in the fourth quarter of 2008 and 3.97% in the first quarter of 2008.
Total portfolio loans and leases at March 31, 2009 were $893.5 million, a decrease of $6.1 million or less than 1% from 2008 year-end balance of $899.6 million. The decrease from year end was primarily in construction loans and leases. Credit quality on the overall loan and lease portfolio remains strong as total non-performing loans and leases represents 45 basis points or $4.0 million of portfolio loans and leases at March 31, 2009. This compares with 65 basis points or $5.8 million at December 31, 2008. The provision for loan and lease losses for the quarter ended March 31, 2009 and 2008 was $1.6 million and $854 thousand, respectively. At March 31, 2009, the allowance for loan and lease losses ("allowance") of $10.1 million represents 1.13% of portfolio loans and leases compared with 1.15% at December 31, 2008 and 1.02% at March 31, 2008. The decrease in the allowance from 1.15% to 1.13% at March 31, 2009 is due in part to the charge-off related to the site development loan transfered to OREO. Substantially all of the charge-off on the site development loan was included in the allowance for loan and lease losses at December 31, 2008.
The Corporation's investment portfolio decreased $2.2 million or 2.0% to $106.2 million at March 31, 2009 from $108.3 million at December 31, 2008 due to the maturity of investments and the paydown of mortgage backed securities that were not replaced. On March 31, 2009, the fair value of the Corporation's investment security portfolio was $106.2 million compared with its amortized cost of $105.2 million. Money market fund balances grew to $72.4 million at March 31, 2009 from $5.1 million at December 31, 2008. These excess funds were the result of increased deposit, money market and savings account activity and lower loan fundings. These funds provide a higher yield than the Federal Reserve and other depository institutions. The Corporation continues to place a strong emphasis on overnight liquidity without taking undue risk.
Average total interest bearing deposits were up $78.1 million or 12.4% from the year ago period. Over the past 12 months the Corporation had significant increases in money market and savings accounts. Funding from wholesale sources, which includes wholesale deposits, Insured Network Deposits ("IND") deposits, subordinated debt and borrowings, at March 31, 2009 of approximately $283.7 million was $37.2 million lower than the $320.9 million at December 31, 2008. The increase in deposit activity during the first quarter of 2009 reduced the Corporation's dependency on more expensive wholesale funding.
The maximum borrowing capacity at the Federal Home Loan Bank of Pittsburgh ("FHLB-P") as of March 31, 2009 is $421.1 million, with the Corporation having $258.3 million or approximately 61% available, and the borrowing capacity at the Federal Reserve is $97.8 million, up approximately $89 million from December 31, 2008. See the Liquidity section for a detailed breakdown of borrowing capacity limits and changes.
The tax equivalent net interest margin was 3.62% in the first quarter of 2009 which has declined from the 3.63% and 3.97% in the fourth and first quarters of 2008, respectively, due to lower rates on interest earning assets partially offset by lower costs of interest bearing liabilities.
For the quarter ended March 31, 2009, non-interest income was $7.5 million, an increase of $1.9 million or 32.9% from the $5.6 million in the same period last year. This increase was primarily due to the net gain on sale of residential mortgage loans increasing $1.5 million or 465.4% from a year ago and the gain on sale of investments which increased $250 thousand or 112.6% from the first quarter of 2008. Mortgage originations for the first quarter of 2009 were $96.5 million compared to $25.8 million in the fourth quarter
of 2008 and $28.8 million in the first quarter of 2008, resulting in a significant increase in the gain on sale of residential mortgage loans. Total wealth revenue continued to be impacted by lower market valuations during the first quarter of 2009. Wealth revenues increased 5.8% to $3.5 million as of March 31, 2009 compared to $3.3 million in the first quarter of 2008. The addition of Lau Associates in the third quarter of 2008 offset declines in wealth revenue from BMTC.
For the quarter ended March 31, 2009, non-interest expense was $11.5 million, an increase of $2.4 million or 26.3% over the $9.1 million in the same period last year. Costs related to the increase in residential mortgage loan originations, personnel, employee benefit costs and related support costs associated with new business initiatives including the Lau Associates acquisition, the opening of our West Chester regional banking center and The Bryn Mawr Trust Company of Delaware, along with a $231 thousand increase in FDIC insurance costs were the largest contributors to this increase.
Key Performance Ratios
Key financial performance ratios for the three months ended March 31, 2009 and
2008 are shown in the table below:
Three Months Ended
March 31,
2009 2008
ROE 11.54 % 12.83 %
ROA 0.92 % 1.23 %
Efficiency ratio 66.29 % 63.77 %
Net interest margin 3.62 % 3.97 %
Diluted earnings per share $ 0.31 $ 0.34
Dividend per share $ 0.14 $ 0.13
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Key period end ratios are shown in the table below:
March 31 December 31
2009 2008
Book value per share $ 10.99 $ 10.76
Tangible book value per share $ 9.78 $ 9.55
Allowance for loan and lease losses as a percentage
of loans 1.13 % 1.15 %
Tier I capital to risk weighted assets 8.96 % 8.81 %
Tangible common equity ratio 7.20 % 7.13 %
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Components of Net Income
Net income is affected by five major elements: Net Interest Income or the difference between interest income earned on loans, leases and investments and interest expense paid on deposit and borrowed funds; the Provision for Loan and Lease Losses or the amount added to the allowance for loan and lease losses to provide reserves for inherent losses on loans and leases; Non-Interest Income which is made up primarily of certain fees, trust income, residential mortgage activities and gains and losses from the sale of securities; Non-Interest Expenses which consist primarily of salaries, employee benefits and other operating expenses; and Income Taxes. Each of these major elements will be reviewed in more detail in the following discussion.
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
The tax equivalent net interest income for the three months ended March 31, 2009 of $9.7 million was $1.0 million or 11.7% higher than the net interest income for the same period in 2008 of $8.6 million. This increase was substantially volume driven as average loan growth of $93.1 million or 11.5% and investment portfolio growth of $51.5 million or 90.4% were able to offset several prime rate decreases and the impact of a higher level of wholesale funds, which includes wholesale deposits, subordinated debt and borrowings.
Average interest bearing liabilities increased $181.2 million or 26.0% to $878.8 million during the first quarter of 2009 compared to $697.7 million during first quarter of 2008. The decrease in the rate on interest bearing liabilities from 3.14% in the first quarter 2008 to 2.15% in the first quarter of 2009 is due to higher rate wholesale deposits maturing, the increase of lower rate money market and savings accounts and aggressive management of deposit pricing. The interest rate on the subordinated debt reset during the first quarter of 2009 resulting in a decrease of 84 basis points. Average total wholesale funding increased $104.4 million or 52.8% to $302.0 million compared to the same period last year. The change in average deposit balances from the first quarter of 2008 was a $95.9 million increase or 12.4%.
Despite the increase in tax equivalent net interest income due to decreased interest expense, the tax equivalent net interest margin on interest earning assets decreased by 35 basis points from 3.97% in the first quarter of 2008 to 3.62% at March 31, 2009 due to lower rates on interest earning assets.
We present information on a tax equivalent basis for net interest income. Total net interest income was $9.6 million and total equivalent net interest income was $9.7 million, for a difference of $65 thousand or 0.7%.
The rate volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as it relates to the change in balances (volume) and the change in interest rates (rate) of tax equivalent net interest income for the quarter ended March 31, 2009 compared to March 31, 2008 broken out by rate and volume.
Rate /Volume Analysis on a tax equivalent basis
Three Months Ended
March 31,
(dollars in thousands) 2009 Compared to 2008
Increase/(Decrease) Volume Rate Total
Interest Income:
Interest-bearing deposits with other banks $ 181 $ (206 ) $ (25 )
Federal funds sold (42 ) (17 ) (59 )
Money market funds sold 82 - 82
Investment securities available for sale 633 (120 ) 513
Loans and leases 1,466 (1,752 ) (286 )
Total interest income 2,320 (2,095 ) 225
Interest Expense:
Savings, NOW and market rate accounts 219 (460 ) (241 )
Wholesale deposits (324 ) (509 ) (833 )
Time deposits 132 (693 ) (561 )
Borrowed funds 978 (130 ) 848
Total interest expense 1,005 (1,792 ) (787 )
Interest differential $ 1,315 $ (303 ) $ 1,012
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Analyses of Interest Rates and Interest Differential
The table below presents the major asset and liability categories on an average
daily basis for the periods presented, along with interest income and expense
and key rates and yields.
For the Three Months Ended March 31,
2009 2008
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(dollars in thousands) Balance Expense Paid Balance Expense Paid
Assets:
Interest-bearing deposits with
other banks $ 29,434 $ 17 0.23 % $ 5,507 $ 42 3.07 %
Federal funds sold 2,222 1 0.18 % 7,318 60 3.30 %
Money market funds 40,903 82 0.81 % - - -
Investment securities available for
sale:
Taxable 98,240 1,116 4.61 % 49,251 617 5.04 %
Tax-exempt 10,173 107 4.27 % 7,700 93 4.86 %
Total investment securities 108,413 1,223 4.58 % 56,951 710 5.01 %
Loans and leases (1) (2) 903,693 13,035 5.85 % 810,585 13,321 6.61 %
Total interest earning assets 1,084,665 14,358 5.37 % 880,361 14,133 6.46 %
Cash and due from banks 11,706 22,306
Allowance for loan and lease losses (10,353 ) (8,179 )
Other assets 69,175 54,908
Total assets $ 1,155,193 $ 949,396
Liabilities:
Savings, NOW and market rate
accounts $ 368,917 $ 816 0.90 % $ 304,688 $ 1,057 1.40 %
IND deposits 29,287 28 0.39 % - - -
Wholesale deposits 103,562 785 3.07 % 131,505 1,646 5.03 %
Time deposits 207,964 1,554 3.03 % 195,413 2,115 4.35 %
Total interest-bearing deposits 709,730 3,183 1.82 % 631,606 4,818 3.07 %
Borrowed funds 154,114 1,263 3.32 % 66,071 636 3.87 %
Subordinated debt 15,000 221 5.98 % - - -
Total interest-bearing liabilities 878,844 4,667 2.15 % 697,677 5,454 3.14 %
Noninterest-bearing demand deposits 160,295 142,532
Other liabilities 23,559 18,361
Total noninterest-bearing
liabilities 183,854 160,893
Total liabilities 1,062,698 858,570
Shareholders' equity 92,495 90,826
Total liabilities and shareholders'
equity $ 1,155,193 $ 949,396
Net interest spread 3.22 % 3.32 %
Effect of noninterest-bearing
sources 0.40 % 0.65 %
Net interest income/ margin on
earning assets $ 9,691 3.62 % $ 8,679 3.97 %
Tax equivalent adjustment $ 65 0.02 % $ 71 0.03 %
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(1) Non-accrual loans have been included in average loan balances, but interest on nonaccrual loans has not been included for purposes of determining interest income.
(2) Loans and leases include portfolio loans and leases and loans held for sale.
Tax Equivalent Net Interest Margin
The Corporation's net interest margin decreased 35 basis points to 3.62% in the first quarter of 2009 from 3.97% in the same period last year. The interest bearing liability cost decreased in the first quarter of 2009 to 2.15%, a decrease of 99 basis points from the first quarter of 2008. This reduction was slower than the earning asset yield drop of 109 basis points during the same period, mainly due to competitive pressures and pricing by other institutions which kept deposit rates abnormally high.
The tax equivalent net interest margin and related components for the past five linked quarters are shown in the table below.
Interest Effect of
Earning Bearing Net Non-Interest Net
Asset Liability Interest Bearing Interest
Year Yield Cost Spread Sources Margin
Net Interest Margin Last Five Quarters
1st Quarter 2009 5.37 % 2.15 % 3.22 % 0.40 % 3.62 %
4th Quarter 2008 5.63 % 2.42 % 3.21 % 0.42 % 3.63 %
3rd Quarter 2008 5.94 % 2.47 % 3.47 % 0.43 % 3.90 %
2nd Quarter 2008 6.05 % 2.58 % 3.47 % 0.50 % 3.97 %
1st Quarter 2008 6.46 % 3.14 % 3.32 % 0.65 % 3.97 %
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Interest Rate Sensitivity
The Corporation actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. ALCO, using policies and procedures approved by the Corporation's Board of Directors, is responsible for managing the interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offering of loan and selected deposit terms and through wholesale funding. Wholesale funding consists of several sources including borrowings from the FHLB-P, Federal Reserve Bank of Philadelphia discount window, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service ("CDARS"), IND and PLGIT.
The Corporation uses several tools to manage its interest rate risk including interest rate sensitivity analysis (a/k/a "GAP Analysis"), market value of portfolio equity analysis, interest rate simulations under various rate scenarios and tax equivalent net interest margin reports. The results of these reports are compared to limits established by the Corporation's ALCO Policies and appropriate adjustments are made if the results are outside of established limits.
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Corporation's projected net interest income over the next 12 months.
This simulation assumes that there is no growth in the balance sheet over the next twelve months. The changes to net interest income shown below are in compliance with the Corporation's policy guidelines. Actual results may differ significantly from the interest rate simulation due to numerous factors including assumptions, the competitive environment, market reactions and customer behavior.
Summary of Interest Rate Simulation
March 31, 2009
Change In Net Interest Income Over
(dollars in thousands) Next 12 Months
Change in Interest Rates
+300 basis points $ 2,909 7.45 %
+200 basis points $ 1,899 4.86 %
+100 basis points $ 110 0.28 %
-100 basis points $ 167 0.43 %
-200 basis points $ - N/A
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The interest rate simulation above indicates that the Corporation's balance sheet as of March 31, 2009 is essentially interest rate neutral to asset sensitive. Asset neutral means that an increase or decrease in interest rates will not have a significant impact on net interest income over the next 12 months. However, a 200 basis point and 300 basis point increase in rates will significantly enhance the Bank's net interest income. A 100 basis point increase in rates is asset neutral since the Bank's prime rate is currently higher than
Wall Street Journal Prime. The interest rate simulation is an estimate based on . . .
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